OECD - FAO AGRICULTURAL OUTLOOK 2008-2017

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OECD-FAO

Agricultural Outlook

2008-2017

HIGHLIGHTS

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

• The Outlook in Brief

• Chapter 1. Overview

• Chapter 2. Are High Prices here to Stay?

• Annex A. Statistical Tables

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the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies.

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OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members.

Also available in French under the title:

Perspectives agricoles de l’OCDE et de la FAO 2008-2017

Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.

OECD freely authorises the use, including the photocopy, of this material for private, non-commercial purposes. Permission to photocopy portions of this material for any public use or commercial purpose may be obtained from the Copyright Clearance Center (CCC) at [email protected] or the

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Foreword

T

his is the fourth time that the Agricultural Outlook report has been prepared jointly by the Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO) of the United Nations. The report draws on the commodity, policy and country expertise of both Organisations in providing a longer-term assessment of future prospects in the major world agricultural commodity markets.

The report is published annually, as part of a continuing effort to promote informed discussion of emerging market and policy issues. This edition of the Agricultural Outlook offers an assessment of agricultural markets covering cereals, oilseeds, sugar, meats, milk and dairy products over the period 2008 to 2017. For the first time, it also includes an analysis of and projections for global biofuel markets for bioethanol and biodiesel, facilitating the discussion of interactions between these markets and those for the main agricultural feedstocks used in their production. The market assessments for all the commodities are based on a set of projections that are conditional on specific assumptions regarding macroeconomic factors, agricultural and trade policies and production technologies; they also assume average weather conditions and longer-term productivity trends. Using the underlying assumptions, the Agricultural Outlook presents a plausible scenario for the evolution of agricultural markets over the next decade and provides a benchmark for the analysis of agricultural market outcomes that would result from alternative economic or policy assumptions.

This year’s Outlook is set against a backdrop of exceptional increases in prices for many agricultural commodities, and this has posed a considerable challenge in preparing the projections and assessing the “durability” of the various influences shaping these prices. That is, which of the factors that are driving up prices are temporary and which will prove to be more permanent influences? How will they individually and collectively affect price levels, price trends and price volatility in the future? How will markets react to currently high prices and a more uncertain price outlook? What are the appropriate policy responses? This report comes at a very timely moment and provides important information, with a view to enlightening the discussion on food-price increases, their causes and their likely consequences for agricultural markets as well as for the policy-formulation process.

The projections and assessments provided in this report are the result of close co-operation between the OECD and the FAO Secretariats and national experts in member and some non-member countries, and thus reflect the combined knowledge and expertise of this wide group of participants. A jointly developed modelling system, based on the OECD’s Aglink and FAO’s Cosimo models, facilitated the assurance of consistency in the projections. The fully documented Outlook database, including historical data and projections, is available through the OECD-FAO joint Internet site

www.agri-outlook.org. Within the OECD, this publication is prepared by the Trade and Agriculture

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Acknowledgements.

This Agricultural Outlook was prepared by the following staff members of the OECD and FAO Secretariats:

At the OECD, the team of economic and market analysts of the OECD Trade and Agriculture Directorate that contributed to this report consisted of Loek BOONEKAMP (team leader), Marcel ADENAUER, Céline GINER, Alexis FOURNIER, Franziska JUNKER, Garry SMITH, Pavel VAVRA (outlook co-ordinator) and Martin VON LAMPE.

Research and statistical assistance were provided by Armelle ELASRI, Alexis FOURNIER, Claude NENERT and Nicolas RUIZ. Secretarial services and co-ordination in report preparation was provided by Christine CAMERON, Nina DHUMAL, Anita LARI and Stéfanie MILOWSKI. Technical assistance in the preparation of the Outlook database was provided by Frano ILICIC. Many other colleagues in the OECD Secretariat and member country delegations furnished useful comments on earlier drafts of the report. The contribution of Joe DEWBRE in reviewing and editing Chapter 2 of this report and Linda FULPONI in drafting Box 2.1 in that chapter is particularly acknowledged.

At FAO, the team of economists and commodity officers from the Commodities and Trade D i v i s i o n c o n t r i b u t i n g t o t hi s e d i t i o n c o n s i s t e d o f A b d o l re z a A B BA S S I A N, El Mamoun AMROUK Concepcion CALPE, Kaison CHANG, Merritt CLUFF (team leader), P i e ro C O N F O R T I , C h e n g FA N G, H o l g e r M AT T H E Y ( b a s e l i n e c o - o rd i n a t o r ) , Adam PRAKASH, Grégoire TALLARD, Peter THOENES, Koji YANAGISHIMA, and Carola FABI from the Statistics Division. AliArslan GURKAN and Alexander SARRIS initiated support for FAO’s Cosimo modelling project.

Research assistance and database preparation was provided by Claudio CERQUILINI, Berardina FORZINETTI, John HEINE, Marco MILO, and Barbara SENFTER. Secretarial services were provided by Rita ASHTON.

Chapter 2 of this report was drafted by Wyatt THOMPSON (University of Missouri) elaborating on and analysing input from the OECD and FAO Secretariats, Pierre CHARLEBOIS (Agriculture and Agrifood Canada), Frank ROSE (Lewis University, formerly CBOT) and Pat Westhoff (University of Missouri).

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Acronyms and abbreviations

ACP African, Caribbean and Pacific countries

AMAD Agricultural Market Access Database

AUSFTA Australia and United States Free Trade Agreement

AI Avian Influenza

BNGY Billion gallons per year

BNLY Billion litres per year

BSE Bovine Spongiform Encephalopathy

Bt Billion tonnes

BTL Biomass to liquid

CAFTA Central American Free Trade Agreement

CAP Common Agricultural Policy (EU)

CCC Commodity Credit Corporation

CET Common External Tariff

CIS Commonwealth of Independent States

CPI Consumer Price Index

CRP Conservation Reserve Program of the United States

CMO Common Market Organisation for sugar (EU)

Cts/lb Cents per pound

cwe Carcass weight equivalent

DBES Date-based Export Scheme

DDA Doha Development Agenda

DDG Dried Distiller’s Grains

dw Dressed weight

EBA Everything-But-Arms Initiative (EU)

ECOWAP West Africa Regional Agricultural Policy

ECOWAS Economic Community of West African States

EISA Act Energy Independence and Security Act of 2007 (US)

EPAs Economic Partnership Agreements (between EU and ACP countries)

ERS Economic Research Service of the US Department for Agriculture

est Estimate

E85 Blends of biofuel in transport fuel that represent 85 percent of the fuel

volume

EU European Union

EU-15 Fifteen member states of the European Union

EU-10 Ten new member states of the European Union from May 2004

EU-27 Twenty seven member states of the European Union (including Bulgaria

and Romania from 2007)

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FMD Foot and Mouth Disease

FOB Free on board (export price)

FR Federal Reserve (US central bank)

FSRI ACT Farm Security and Rural Investment Act (US) of 2002

FTA Free Trade Agreement

GDP Gross Domestic Product

G-10 Group of 10 countries (see Glossary)

G-20 Group of 20 developing countries (see Glossary)

GDPD Gross Domestic Product Deflator

GHG Green House Gases

GMO Genetically modified organism

HFCS High Fructose Corn Syrup

HS Harmonised Commodity Description and Coding System

IEA International Energy Agency

kt Thousand tonnes

LAC Latin America and the Caribbean

La Niña Climatic condition associated with temperature of major sea currents

LDC’s Least Developed Countries

LICONSA Leche Industralizada

lw Live weight

MERCOSUR Common Market of the South

MFN Most Favoured Nation

Mha Million hectares

MPS Market Price Support

Mt Million tonnes

MTBE Methyl Tertiary Butyl Ether

NAFTA North American Free Trade Agreement

OECD Organisation for Economic Co-operation and Development

OIE World Organisation for Animal Health

PCE Private Consumption Expenditure

PIK Payment in kind programme (US)

PROCAMPO Mexican Farmers Direct Support Programme

PPP Purchasing Power Parity

PRRS Porcine Reproductive and Respiratory Syndrome

PSE Producer Support Estimate

pw Product weight

R&D Research and Development

rse Raw sugar equivalent

rtc Ready to cook

RFS Renewable Fuels Standard in the US, which is part of the Energy Policy Act

of 2005

rwt Retail weight

SEAC Spongiform Encephalopathy Advisory Committee

SFP Single Farm Payment scheme (EU)

SMP Skim milk powder

SPS Sanitary and Phytosanitary measures

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t Tonnes

t/ha Tonnes/hectare

TRQ Tariff rate quota

UK United Kingdom

UN The United Nations

URAA Uruguay Round Agreement on Agriculture

UNCTAD United Nations Conference on Trade and Development

US United States of America

USDA United States Department of Agriculture

VAT Value added tax

v-CJD New Creutzfeld-Jakob-Disease

WAEMU West African Economic and Monetary Union

WMP Whole milk powder

WTO World Trade Organisation

Symbols

AUD Dollars (Australia) KRW Korean won

ARS Pesos (Argentina) lb Pound

Bn Billion Mn Million

BRL Real (Brazil) MXN Mexican pesos

CAD Dollars (Canada) NZD Dollars (New Zealand)

CNY Yuan (China) p.a Per annum

EUR Euro (Europe) RUR Ruble (Russia)

gal Gallons THB Thai baht

Ha Hectare USD Dollars (United States)

hl Hectolitre ZAR South African rand

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THE OUTLOOK IN BRIEF

● World reference prices in nominal terms for almost all agricultural commodities covered in this report are at or above previous record levels (see Fig. 2.1). This will not last and prices will gradually come down because of the transitory nature of some of the factors that are behind the recent hikes. But there is strong reason to believe that there are now also permanent factors underpinning prices that will work to keep them both at higher average levels than in the past and reduce the long-term decline in real terms. Whether transitory or permanent, appropriate policy action for agricultural development and for addressing the needs of the hungry and the poor needs to take account of both these characteristics.

● The dramatic increase in prices since 2005/06 is partly the result of adverse weather conditions in major grain-producing regions in the world, with spill-over effects on crops and livestock that compete for the same land. In a context of low global stocks, these developments alone would have triggered strong price reactions. These conditions are not new; they have happened in the past and prices have come down once more normal conditions prevail and supply responds over time. The Outlook sees no reason to believe that this will not recur over the next few years.

● Once they have fallen from their current peaks, however, prices will remain at higher average levels over the medium term than in the past decade. But the underlying forces that drive agricultural product supply (by and large productivity gains) will eventually outweigh the forces that determine stronger demand, both for food and feed as well as for industrial demand, most notably for biofuel production. Consequently, prices will resume their decline in real terms, though possibly not by quite as much as in the past (see Figures 1.1, 1.4 and 1.5 in the Overview section).

● On the supply side, the Outlook expects continued yield growth for crops to be more important than new areas brought into cultivation in determining crop supply. Slowly increasing dairy and livestock yields also support the increase in milk and meat production. A key assumption in the Outlook is some strengthening of the US dollar against most currencies. In the countries affected by this change, this will reinforce domestic price incentives to increase production. These factors combine to sustain the growth of global agricultural production, although some of that impetus is abated by the supply-reducing effect of high oil prices that raise production costs.

● On the demand side, changing diets, urbanisation, economic growth and expanding populations are driving food and feed demand in developing countries. Globally, and in absolute terms, food and feed remain the largest sources of demand growth in agriculture. But stacked on top of this is now the fast-growing demand for feedstock to fuel a fast-growing bioenergy sector. While smaller than the increase in food and feed use, biofuel demand is the largest source of new demand in decades and a strong factor underpinning the upward shift in agricultural commodity prices.

● As a result of these dynamics in supply and demand, the Outlook suggests that commodity prices – in nominal terms – over the medium term will average substantially above the levels that prevailed in the past 10 years. When the average for 2008 to 2017 is compared with that over 1998 to 2007, beef and pork prices may be some 20% higher; raw and white sugar around 30%; wheat, maize and skim milk powder 40 to 60%; butter and oilseeds more than 60% and vegetable oils over 80%. Over the Outlook period, prices will resume their decline in real terms, albeit at a slower rate. However, the impact of various supply and demand factors on prices will differ across commodities.

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● Within this overall context, the epicentre of global agriculture will further shift from the OECD towards developing countries. Both consumption and production are growing faster in developing countries for all products except wheat. By 2017, these countries are expected to dominate production and consumption of most commodities, with the exception of coarse grains, cheese, and skim-milk powder.

● Corresponding shifts are also occurring in global trade patterns. Imports are growing most in developing countries, and an increasing share of this growth is captured by larger exports from other emerging and developing countries. Export growth in developing countries is greater, and sometimes very much so for almost all products. However, while the share of OECD countries in world exports falls, these countries continue to dominate export trade for wheat, coarse grains, pork and all dairy products.

● High prices are good for some and bad for others. They are beneficial for many commercial producers in both developed and developing countries. However, many farmers in developing countries are not linked to markets and will draw little or no benefit from currently higher prices. But the poor, and in particular the urban poor in net food importing developing countries, will suffer more. In many low-income countries, food expenditures average over 50% of income and the higher prices contained in this Outlook will push more people into undernourishment.

● For the Least Developed Countries, especially the food-deficit group, the projections thus show greatly increased vulnerability and uncertain food supplies during an era of high commodity prices and high price volatility. This underscores the importance of developing their domestic supply capacity by improving the overall environment in which agriculture operates through enhancing governance and administrative systems and investing in education, training and extension services, research and development and physical infrastructure. While these are longer-term remedies, it is important in the short term that commodity trade functions efficiently to facilitate the allocation of available commodity supplies.

● This Outlook assumes unchanged agricultural and trade policies. The actual evolution of agricultural commodity and food prices, however, hinges importantly on future policy developments. In this context, increased humanitarian aid is needed to reduce the negative impact of high prices on the very poor, and this could be done without any major impact on markets.

● Such effects would result, however, from trade-restricting policies such as export taxes and embargos. These may in the short term provide some relief to domestic consumers but in fact impose a burden on domestic producers and limit their supply response, as well as contribute to global commodity market uncertainty. Similarly, measures to protect domestic producers of agricultural commodities through border measures imposes a burden on domestic consumers; it would also restrict growth opportunities for producers abroad.

● Policy support, as well as oil-price developments, will strongly influence the evolution of future demand from biofuel for agricultural commodity feedstocks. In this context, neither the US Energy Independence and Security Act (EISA) nor proposals for a new EU bioenergy directive are taken into account. Changes in either, or new technological developments would also have a strong impact on projected world prices for agricultural commodities and for the availability for food and feed use. In this report, second generation biofuels are not expected to be produced on a commercial basis over the Outlook period.

● Finally, over the longer term, agricultural supply is facing increased uncertainties and limitations to the amount of new land that can be taken into cultivation. Public and private investments in innovation and increasing agricultural productivity, particularly in developing countries, would greatly improve supply prospects by helping to broaden the production base and lessen the chance of recurring commodity price spikes.

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Chapter 1

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T

his version of the OECD-FAO Agricultural Outlook is set against a background where world reference prices for most agricultural commodities covered in this report are at or above previous record levels, at least in nominal terms. While some of the reasons for these high prices are transitory, there is strong reason to believe that there are now also permanent factors underpinning prices that will work to keep them at higher average levels than in the past (Figure 1.1).

The Outlook paints a picture of a further gradual shift in the epicentre of agricultural production, consumption and trade from OECD to developing countries. This happens against a backdrop of record high prices of almost all agricultural products at the beginning

of the Outlook. The Outlook indicates that current price levels can be explained by both

transitory and permanent factors. There is strong reason to suspect that the more permanent factors will result in a structural upward shift in real agricultural commodity prices. But from these sometimes substantially higher average levels, when compared to the past decade, real prices will again begin to decline, though at a more gradual rate than in the past.

The Outlook is set in a context of assumed sustained economic growth around the globe, high crude oil prices, contained inflation, constant real exchange rates and unchanged policies. Markets are assumed not to be influenced by “abnormal” weather conditions, and any possible impacts of climate change and water shortages are not considered. Deviations from these assumed conditions would lead to potentially much different market outcomes.

Figure 1.1. World commodity prices at higher average levels

Source:OECD and FAO Secretariats

Nominal Real

Per cent growth between : average 2008-2017 and average 1998-2007

-20 0 20 40 60 80 100

Wheat Coarse grains

Rice Butter Cheese SMP Oilseeds Veget. oils

Beef (Pacific)

Pigmeat (Pacific)

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The principal underlying assumptions

Lower but sustained economic and population growth underpins demand

Economic activity at the beginning of the Outlook is slowing most notably in the US, the

world’s leading economy. The slowdown in the US and some other OECD economies is occurring despite continuing robust economic conditions in many other parts of the world. Within this context, growth prospects for OECD countries in the short and longer term are just above 2% (annual average). Robust activity levels in the main emerging economies are projected to remain a major driver of global economic expansion in the near term. In the medium and longer term a modest deceleration is projected. China and India will remain growth leaders among developing countries, with substantial market expansion and GDP growth anticipated for both countries as they become further integrated into the global economy and world trade.

Population dynamics are important determinants of the future global economic environment, directly affecting demand for agricultural commodities. Population growth over the next decade will decline relative to the last 10 years to an average of 1.1% annually to reach approximately 7.4 billion in 2017. The fastest population growth is expected in Africa (annual average above 2%), whereas in Europe, population is expected to essentially stabilise over the coming decade (Table 1.1).

No major hike in inflation despite continued high oil prices

Despite recent hikes in food prices, sustained global growth and world trade expansion, general price levels in many countries have remained remarkably stable. This situation has reinforced expectations that inflation in OECD countries will remain low over the longer term. Measured by the Private Consumer Expenditure (PCDE) deflator, inflation will remain low in the coming decade. For OECD countries as a whole, inflation is assumed to be just above 2% per year. High consumer price inflation continues to plague some emerging and developing countries such as the Russian Federation and India with levels above 5% per annum. Inflation in Russia is, nevertheless, expected to fall to less than half the prevailing rate during 2005-07. A significant decline is also assumed for Argentina, with inflation at below 5% per year.

The world oil price assumption underlying this year’s Agricultural Outlook is based on

that published in the OECD Economic Outlook n° 82 (December 2007). It assumes prices to

slowly increase over the outlook period from USD 90 per barrel in 2008 to USD 104 per barrel by 2017. This does not exclude the possibility of substantial variations around these

Table 1.1. Some decline in population growth

Average annual growth over 10 year period, percentage

Population growth

1998-2007 2008-2017

World 1.23 1.12

Africa 2.37 2.21

Latin America and Caribbean 1.28 1.14

North America 1.01 0.88

Europe 0.30 0.10

Asia and Pacific 1.27 1.11

Oceania developed 1.18 0.92

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levels througout the period or within any given year. However, future oil prices are a major

uncertainty in the Outlook. Some analysts emphasise that high oil prices will slow demand,

ultimately reducing the price of oil. Others argue that consumption, production and processing capacities are relatively inelastic in the short term, sustaining continued high,

or even further increasing, prices. This year’s Agricultural Outlook is based on the high-price

scenario. Pressure on oil prices has been maintained thus far as geopolitical tensions combine with processing capacity constraints to keep global supply from the major oil producers below effective demand.

Conditions remain favourable for further growth in biofuel production

For the first time, this Outlook specifically includes projections for supply, demand,

trade and prices of ethanol and biodiesel derived from agricultural feedstock. The main forces driving further growth in biofuel production are high crude oil prices and continued public support, in particular in OECD countries. However, the latest bioenergy policy changes in the EU and the US are not taken into consideration. Neither do the projections and the assessed impacts on commodity markets take account of the possibility of changes in production technologies. Such changes would modify the economics of biofuel production and affect the market and trade outcomes.

The US dollar is expected to strengthen against most currencies

Under an assumption of constant real exchange rates, inflation differentials vis-à-vis

the United States are the primary determinant of projections for exchange rates over the

Outlook period. This implies a strengthening of the US dollar against most currencies, even if currently there are signs of a further weakening of the dollar in the short term. Over the

course of the Outlook period, the euro exchange rate is projected to remain stable. However,

very low levels of inflation in Japan relative to the United States mean that the Yen is expected to appreciate further. The currencies of high growth/high inflation countries such as Brazil, India, Turkey and South Africa will depreciate most over the medium term.

The Outlook reflects policies in place in early 2008

Agricultural and trade policies play an important role in both domestic and international markets for agricultural commodities and food products. While agricultural policies are becoming increasingly decoupled from production decisions, non-agricultural policies, such as those for instance with respect to energy, or the environment, are having a growing impact on the agri-food sector. Policies influence the composition and levels of both production and consumption, thereby creating (or sometimes correcting) market distortions and influencing prices. There is a tendency towards increased price responsiveness on the supply side with ongoing policy reform in some OECD countries. Also, relatively elastic supply and demand in a growing number of developing countries, coupled with an increasing share of these countries in world trade, is improving

adjustments in agricultural markets. As in the past, this Outlook assumes constant policies

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Main trends in commodity markets

Grain markets set to remain tight

Despite record wheat and coarse grain crops in 2007/08 and a sustained moderate rise in production thereafter, grain markets are expected to remain tight in the period to 2017. The prolific demand for maize arising from the rapidly expanding ethanol sector in the United States has profoundly affected the coarse-grain market. By 2017, approximately 40% of the country’s maize crop could be destined for energy production. Growth in grain-based ethanol industries, in particular in North America and Europe, as well as rising feed requirements for flourishing livestock sectors, look set to further pressure the already

critically low global grain stocks-to-use ratio over the course of the Outlook.

Owing to currently low stocks and high prices there will be an incentive to plant more land for grain production. In addition to a foreseen sustained recovery in production in drought-stricken Australia, the area under cereals is projected to rise for a number of reasons. There will in particular be some reallocation of land from other crops in the main OECD producers such as Canada, the US or the EU. In addition, land is taken out of set-aside in the EU for 2008. Finally, new land will be taken into cultivation, particularly in South and Latin America, Sub-Saharan Africa and the Commonwealth of Independent States (CIS). However, overall there will be constraints in expanding new arable areas in many countries and competition for land and resources among grain and oilseed crops is set to intensify with those crops offering the

highest returns gaining the most ground. As a result, beyond the initial years of the Outlook,

much of the growth in world grain output is expected to stem from productivity gains, but yield growth is not expected to match the rate attained in the previous decade.

Grain trade to reach new heights

Wheat exports have remained subdued in recent years, reflecting adverse weather in several important countries, especially in Australia and successively poor harvests in the EU. But global wheat trade is projected to expand at an average annual rate of less than 1%

over the Outlook period. Australia is foreseen to resume the mantle of being the

second-largest wheat exporter after the United States. As for coarse grains, the recuperation of traditional export sources will be supplemented by an export expansion in Ukraine.

Developing countries, such as those situated in South and East Asia, as well as Nigeria and Egypt, will continue to fuel global wheat demand. Saudi Arabia is also projected to become a major importer in view of the recent change in its policy to gradually phase out production

subsidies. Although the Outlook projects expanding exports from OECD countries, most of the

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Productivity gains underpin rice supply

Global rice production could expand on the order of 10% by the end of the Outlook,

fuelled by larger crops in South and South-East Asian countries. The overall trend of rising output masks an expected fall in area, which gathers momentum from 2011-12 onwards, reflecting lower plantings in Asian countries due to rivalry with other crops and non-agricultural sectors for land, which leads to an intensification of competition for water and labour resources. Developed countries are also foreseen to plant less by 2017-18, as a reflection mainly of ongoing policies in Japan and the EU. Owing to the dissemination of improved varieties and better production practices, yield growth over the next decade will assume greater prominence in supporting the sector, and this is expected to surpass the growth witnessed over the previous 10-year period.

Rice remains a basic food commodity, and its importance has extended beyond Asia. However, rapid income growth and diversification of diets is expected to depress per capita rice consumption, especially in Asia. In contrast, rice is expected to gain importance in African diets, where per capita consumption rises from 22 kg to more than 24 kg over the 10-year period. As a share of world production, rice trade is expected to fall slightly, indicating a lessening reliance on the global market that is consistent with a return to more stringent rice self-sufficiency policies in several countries. Much of the expansion in world imports is fuelled by demand in Africa and in Asia, with Thailand forecast to account for around one-third of all rice exports.

The tendency for declining global rice stocks could be reversed over the course of the Outlook, as

recent concerns over supply availability and price volatility foster a rebuilding of reserves.

Strong demand drives the oilseed complex

Increasing world livestock production will continue to be the driving force behind the consumption of oilseed-derived protein meal, with most of the growth taking place in non-OECD countries. Comparing 2017 with the 2005-07 base period, oilseed meal consumption in the developing region will rise by almost 50%, with China accounting for roughly half the growth alone, to satisfy its burgeoning livestock sector. While the EU should continue to hold its position as the largest importer of oilseed meals, its import dependency is likely to fall as a growing proportion of the region’s protein meal consumption comes from domestically produced and crushed oilseeds, in particular rapeseed meal.

Notwithstanding the foregoing world oilseeds crush is projected to be mainly driven by vegetable oil demand. Largely sustained by income growth, vegetable oils, both from oilseed crops and from palm, will remain the fastest growing commodity in terms of consumption

covered in this Outlook. Most of the demand growth is for food use, but bioenergy mandates

will play an increasing role. Over the Outlook period, again comparing 2017 with the

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In addition to continued fast growth in feed use, biofuels look set to become a more significant long-term driver of the global oilseed complex, both directly through demand for vegetable oils in the bio-diesel production process and indirectly as increased cereal demand for ethanol production affects the relative prices of oilseeds and thereby the competition for arable land between these crops, especially in the United States. Furthermore, given the relative scarcity of maize, the share of oilmeals in total feed use

may well be increasing over the Outlook period, even as a source for energy.

Buoyed by higher relative prices, land reallocation from competing crops, diverted pasture lands and new arable land could pave the way for global oilseed output to expand by 28% by 2017 when compared to the base period. Much of the foreseen expansion will be concentrated in Brazil, the EU and Argentina. Bolstered by a differential export-tax system, Argentina looks set to consolidate its position as a regional hub for oilseed crushing, despite a slowdown in the expansion of domestic crushing capacity. The country is expected to reaffirm its status as the world’s major centre for shipments of soybean meal and oil, in a context of growing global import demand. China continues to import seeds and crush them domestically to capture the value added from processing oilseeds into protein meals and vegetable oil. Reflecting diminishing consumption growth, China’s crushing industry is expected to develop at an average rate of 3.5% per annum compared to 8.5% in the previous decade. By 2017, China will have become the world’s second-largest importer of oilseed meals and vegetable oils, after the EU, and it will have further reinforced its position as the leading importer of oilseeds. Brazil’s share of global oilseed exports is expected to grow from 30% in 2008 to almost 40% in 2017, when the country easily surpasses the United States as the world’s foremost oilseeds exporter.

Steadfast consumption growth and policy reform could lead to some tightening in sugar markets

Brazil is and will remain the world’s leading sugar and ethanol producer and exporter, and the major centre of international price discovery for sugar. With the composition of Brazil’s private-vehicle fleet increasingly being dominated by flex-fuel vehicles over the

Outlook period, the derived demand for sugar cane from ethanol is expected to surge over the projection period, especially in the context of high projected crude oil prices. As a result, the projected share of the sugarcane crop going to ethanol increases from 51% on average in 2005-07 to 66% in 2017-18. Nevertheless, this development is not expected to unduly constrain the amount of cane available for sugar production and sugar exports, since sugarcane production in Brazil is foreseen to rise by over 75% from the base period to 2017. However, in the wake of steadfast domestic and international demand, there will be a propensity for sugar prices to strengthen over the projection period.

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Following reform of its sugar regime, the EU is expected to reduce production in the context of rising imports and World Trade Organisation (WTO) bound controls on subsidized exports and may eventually emerge as the world’s leading sugar importer. Total sugar imports by the EU are expected to increase sharply by 2017-18, driven mainly by preferential exports from least-developed countries (LDCs) under the Everything But Arms (EBA) initiative and from the Africa-Caribbean-Pacific (ACP) group. However, the level of EU preferential imports from the latter group remains an important uncertainty. Mexican sugar exports to the higher priced United States market should increase with duties and restrictions eliminated under NAFTA on 1 January 2008. When considering shipments from third countries in addition to those from Mexico, United States purchases may exceed the import volume trigger for suspending the marketing allotments program of the 2002 FSRI Act, in all years of the projection period. As a result, public stock purchases (CCC) are expected to be required in each year out to 2017-18 to defend the US sugar loan rate price support system with domestic prices driven down to minimum loan-rate levels.

Developing countries account for virtually all the increase in world sugar production

and consumption over the Outlook, due to faster population growth and rising incomes.

India and China account for the lion’s share in the increase in global consumption. Demand for sugar in China has been growing rapidly in the current decade from relatively low per capita consumption levels. With tightening government controls on artificial sweeteners, sugar consumption in China is projected to increase by 1.5% per year, implying rising imports that exceed the tariff quota of 1.95 Mt from 2008 onwards.

Despite increasing feed costs, world meat production continues to grow

Against a backdrop of high feed costs, low profit margins and competition for land resources, the global outlook for meat is characterised by substantial increases in production and consumption in developing countries and a more stable path of development in the mature OECD markets; though overall growth is expected to take place at slower pace than witnessed in the past decade.

Over the Outlook period, world meat production is expected to grow on average by 2%

per year, but this trend disguises marked differences in growth rates of the different economic regions. Meat production among OECD members is expected to rise annually by around half a per cent, while growth in non-OECD countries could reach around 2.5% annually. Continuing investment, capacity building, better infrastructure and the dissemination of improved production technologies, are the main factors spurring such growth in meat and meat products, particularly in the more dynamic developing economies such as China, Brazil and – for pork and poultry predominantly – also in Argentina. As a result, some of them have been able to increase substantially their presence in supplying international meat markets. Brazil is a prime example of this feat. Given abundant land resources, capital and technology in combination with policy reforms, Brazil is expected to assume a 30% share of total world meat exports by the end of the projections. However, there are lingering concerns about the sustainability of this expansion. With trade recovering from the effects of animal-disease outbreaks, a small number of major exporters including the United States, Canada, Argentina and Australia alongside Brazil will remain dominant in world markets. However, in contrast, the export

share of the EU is expected to further deteriorate over the Outlook.

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origin. Meat consumption in developing countries is expected to account for more than 80% of global growth. Much of this expansion will take place in Asia and the Pacific region, and will reflect in particular the rise in consumption of cheaper sources of animal protein, mainly poultry and pork. Consumption of pork in particular is expected to rise in China where pork is traditionally the most important meat and where 2007 consumption was reduced due to an outbreak of Porcine Reproductive and Respiratory Syndrome (PRRS). Import dependency in meat products is likewise expected to grow in many dynamic developing countries as burgeoning demand surpasses the domestic capacity for meat production throughout the

duration of the Outlook. Among the developed countries, the Russian Federation is set to

remain the world’s largest net meat importer by 2017, followed closely by Japan.

Tightness in dairy market to ease

A pressing issue for the projections concerns how the global dairy industry will react to the unprecedented price spikes across dairy products that were observed in 2007. There is broad consensus that the industry has undergone structural change, where international markets have shifted from a supply-driven paradigm supported by distorting policies which used these markets as a dumping ground for excess supplies, to a more demand-driven paradigm, responsive to market signals and consumer wants. The growing relative importance of demand factors is further explained by urbanisation and higher incomes which have shifted diets in some developing economies towards a more diversified basket of dairy products, encouraged by growth in dairy marketing and retailing channels.

The Outlook foresees that high international prices of dairy products will transmit strong signals for supply response from both traditional and emerging exporters. More importantly, where trade linkages allow higher prices to be transmitted to producers in developing countries, they may create incentives for investment, expansion and restructuring. This will help to reshape their industries, which will be increasingly geared towards higher value-added processing of dairy products. Rising supply potential will enable future production growth and improved domestic marketing linkages, placing these countries in a stronger competitive position in regional and global markets.

Milk production gains over the Outlook period will be overwhelmingly driven by output

growth in non-OECD countries. Dairy expansion in India, the largest producing country in the world, will be especially marked, where surging demand growth will stimulate a strong increase in milk and butter production. Driven by substantial yield gains, strong growth in milk production is also expected in China. This contrasts with moderate growth in the OECD area, where milk production increases mainly due to gains from Oceania and the United States and is chiefly constrained by domestic production controls in many other countries. These supply developments constitute one of the more prominent trends in the

Outlook for dairy markets.

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outlook is the potential for dairy markets to adjust in the presence of increased price volatility and low global stock levels of dairy products.

OECD countries continue to dominate world dairy exports

World exports of dairy products are expected to grow for all products, with only a few developing countries able to affect the shares of traditional OECD exporters of Australia, New Zealand and the EU. In the latter, export shares could decline substantially, in light of a tight domestic market. Among the new exporters, Argentina is emerging as a dominant player in markets for whole-milk powder (WMP) and cheese, supported by its rising milk production capacity. Similarly, Ukraine is expected to increase its presence on the export markets mainly for cheese.

Import markets will remain rather fragmented compared to those for exports. The six largest importers of dairy products are expected to cover less than 50% of the world market. In China, despite a strong increase in milk-production, demand will continue to

outpace supply and imports are expected to grow over the Outlook, in particular for milk

powders, where China will become one of the leading importers. Russia is foreseen to remain as the world’s most prominent importer of butter and cheese, with imports rising

by more than 60% over the Outlook period compared with the 2005-07 base. Driven by

milk-reconstitution needs, global imports of milk powders will grow by over 3% annually over the medium term, mostly in Asia and the Middle East.

Biofuel production and use on an upswing

Production and use of both ethanol and biodiesel have increased significantly in recent years. Production of fuel ethanol tripled between 2000 and 2007, with the US and Brazil accounting for the majority of this growth. However, a large number of other countries either commenced renewable energy programmes or increased fuel ethanol production in this period as well. Biodiesel output witnessed an even more pronounced expansion over the same period, having grown from less than one billion litres to almost 11 billion litres. Initially the EU accounted for more than 90% of global biodiesel production, but with increased biodiesel output in many other countries, in particular the US, its share has declined to less than 60% in 2007.

Near-record prices for maize, wheat and vegetable oils at the start of the Outlook have

reduced the economic viability of biofuel production in many countries, despite strong public support and increasing fossil fuel prices. Public support in the form of tax concessions and tax credits, blending obligations and regulations, and import tariffs are widely applied to help offset higher production costs of biofuels compared to fossil fuels. The one exception is bio-ethanol production from sugarcane in Brazil. In this case, lower world sugar prices associated with a large global surplus have improved the economic viability and profitability of ethanol production in Brazil, which remains competitive with gasoline at a crude oil price of around USD 35 per barrel. Most commodity prices are expected to fall from current highs over the

Outlook period with larger crop production. Coupled with expected high crude oil and biofuel prices over the next few years, the economic situation of biofuel producers should improve compared to the situation in 2007 but remain less favourable than in 2005 and 2006.

Ethanol production to grow as prices stabilise at higher levels

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expected to exceed USD 55 per hectolitre in 2009 as crude oil prices rise, but should fall back to levels around USD 52-53 per hectolitre over the remainder of the projection period as production capacity expands in a number of countries. Following increased mandates international trade in ethanol is expected to grow rapidly to reach 6 billion litres in 2010 and almost 10 billion litres by 2017, despite continuing trade protection. Most of this trade will originate in Brazil, and will be destined for markets in the EU and the US.

Global biodiesel production and use to be driven mainly by public policy

Global biodiesel production is set to grow at slightly higher rates then for bioethanol – which maintains the largest share – to reach some 24 billion litres by 2017. This growth in output occurs despite the fact that world biodiesel prices are expected to remain well above production costs of fossil diesel, and to stay within the range of USD 104-106 per hectolitre, for most of the projection period. As in the case of ethanol, increased blending mandates should stimulate demand and boost international trade in the initial years of the

Outlook. World trade is, however, projected to remain largely unchanged in following years due to technical constraints in the use of palm-oil based biodiesel in the colder climates and as production in the main consuming countries increases. Most of the trade should

originate in Malaysia and Indonesia with the EU as the main destination.1

Main developments in trade in agricultural commodities

Rapid expansion of world trade overall, dominated by developing countries

When measured by imports, world trade is expected to grow for all commodities

covered by the Outlook. The weakest growth is projected for wheat, with total world imports

by 2017 exceeding the average for 2005/07 by nearly 15%. The highest growth rates of between 40 and 50% over this period are projected predominantly for vegetable oils and for certain livestock products (Figure 1.2).

Figure 1.2. Overall strong growth in world trade

Imports in 2017 compared to the 2005-2007 average

Source:OECD and FAO Secretariats.

%

0 10 20 30 40 50 60

Beef

Vege tabl

e oils WM P

Butter Pigme

at

Poul try

Che

ese _Rice Oilme

als

Oilseed s

Wheat

Coa rse g

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When the focus is on crop imports, the projections show that for all crop products in the Outlook, except vegetable oils, developing countries dominate the picture of trade expansion. For wheat, sugar, oilseeds and oilmeals, most of the growth takes place in Asian developing countries. For oilseeds, import growth in Asia exceeds even total trade expansion and is offset to some extend by a decline in imports by OECD countries. For rice and coarse grains, most of the growth in imports takes place in African developing countries, and much of that in the LDCs.

Turning to imports of livestock products, the picture is much different. For the relatively expensive products such as beef, pork and cheese, import growth is dominated by OECD countries. For poultry and milk powders, most of the growth in global imports is explained by larger imports in Asian developing countries. While these countries also represent over 40% of import growth for butter, the largest contribution to the trade expansion for this product is due to larger imports in the CIS countries.

Emerging exporters challenge the dominance of OECD countries

Developing countries not only dominate import growth for most of the commodities

in the Outlook, they also show with few exceptions the strongest growth rates for exports.

For all products in the Outlook but rice, sugar and vegetable oils the growth in exports from

developing country origin exceeds those from OECD countries. The leading growth position for the OECD for these products has to be seen in the context of trade growing from a small base, and in 2017, the OECD share in world exports is only 6% for vegetable oils and 14 and 10% for sugar and rice, respectively. Export growth in developing countries is greater – and sometimes much greater – for all other products, leading to declining shares of OECD countries in world exports for these products. Nevertheless, these countries continue to dominate the world export picture with shares of world trade ranging from 58 to 70% for wheat, coarse grains, pork and all dairy products. It is only for beef and poultry where the export share from developing countries of about 60% exceeds those of the OECD (Figure 1.3).

Figure 1.3. Growth in world exports dominated by developing countries

Exports in 2017 compared to the 2005-2007 average

OECD Developing countries

%

-40 -20 0 20 40 60 80 100 120 140

Wheat Coarse grains

Rice Oilseeds Oilmeals Veget. Oils

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The outlook for world prices

World prices to retreat from current highs but firmness expected to prevail over the medium term

In the context of generally lower global stocks in recent years, biofuels impose an additional dimension to global demand for grains, oilseed products and sugar. Coupled with sustained global income growth which is particularly underpinning demand for food and feed in certain developing and emerging countries, with limitations to land and productivity based increases in supply and with higher oil prices which raises production costs, this situation is expected to underpin international quotations. All three of these factors are expected to lift price levels for arable crops that are, on average, substantially higher than in past projections. Higher average crop prices and associated feed costs, in

turn, lead to higher livestock product prices over the Outlook period as well. When

compared to the average for 1998 to 2007, prices projected for the period 2008 to 2017 will – in nominal terms – on average be around 20% higher for beef and pork, some 30% for raw and white sugar, 40 to 60% for wheat, maize and skim milk powder, more than 60% higher for butter and oilseeds and over 80% higher for vegetable oils (Figures 1.4 and 1.5).

Figure 1.4. Outlook for world crop prices to 2017

Index of nominal prices, 1996 = 1

Source:OECD and FAO secretariats.

Figure 1.5. Outlook for world livestock product prices to 2017

Index of nominal prices, 1996 = 1

0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3

1996 2000 2004 2008 2012 2017 1996 2000 2004 2008 2012 2017 1996 2000 2004 2008 2012 2017 Coarse

grains

Wheat

Rice

Vegetable oils

Oilseeds

Oilseed meals

Raw sugar Refined sugar

0.5 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3

1996 2000 2004 2008 2012 2017 1996 2000 2004 2008 2012 2017 1996 2000 2004 2008 2012 2017 Beef

Poultry

Pigmeat

Cheese

Butter Whole milk

powder

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When expressed in real terms, the decade-over-decade increase is obviously smaller, but remains very substantial for crops and dairy products.

Despite this rise in their average level, prices of most agricultural commodities fall and

are expected to remain below current or recent peak levels by the end of the Outlook. In

addition, there would not appear to be any structural changes in the functioning of markets that would suggest reduced price variability. On the contrary, a number of factors are at play that may well render market prices more variable than in the past. Such factors include continued low stock to use ratios, a possibility of more variable weather conditions, less responsive consumer demand to farm level price changes as the commodity share in the food bill falls, increased industrial demand for agricultural commodities, which also tends to be less price-sensitive than food and feed demand, and massive amounts of non-commercial investment funds that may enter or leave agricultural futures markets with either net long or net short positions as profit opportunities dictate.

Low stock-to-use ratios support cereal prices and prices in the oilseed complex

In spite of the expectation of a strong recovery in grain production in 2008, prevailing low stock levels suggest continued market tightness, especially when demand prospects for food, feed and fuels show no sign of abating. Cereal markets are expected to remain

closely balanced over the Outlook as stock to use ratios are expected to remain low in the

years to come and despite growth in cereal production. This implies high grain prices

throughout most of the Outlook. However, continued productivity increases in line with

their long-term trend and some increase in areas planted are expected to see prices below

their 2007 peak levels. For wheat this is the case throughout the Outlook period, while for

coarse grains prices are likely to remain high for some years to come before falling below present record levels. Despite this decline, grain prices will average above their mean levels of the previous decade, even in real terms. From that higher level, however, real prices continue their long-term downward trend.

International rice prices are anticipated to remain firm in the short term, as countries replenish rice inventories. While weaker prices are projected from 2010, they are unlikely to fall much in consideration of higher production costs. With lower buffer stock levels projected on thin world markets, world prices are likely to manifest much higher volatility than in the past, as the market becomes more vulnerable to supply and demand shocks.

Rising demand for vegetable oils, for both food and the growing biodiesel sector, is expected to weigh heavily over the medium term, leaving stock to use ratios in the oilseed complex under pressure. The combination of strong demand and low inventories will be extremely supportive to prices in the next few years, but from then on prices will gradually fall back as supply and demand adjust. As is the case for cereals, prices for oilseed and oilseed products, once corrected for inflation, are expected to decrease in real terms but to stay considerably above their long-term trend.

Sugar prices strengthen with increasing premium for white sugar

As the world market is brought into closer balance and excess sugar stocks drawn down, world indicator prices for raw and white sugar are projected to rise strongly in nominal terms, but will still trend downwards in real terms over the projection period. The

margin between raw and white sugar prices should widen over the Outlook given

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white-sugar exporter, the white-white-sugar premium in future years should reflect more the cost of further sugar refining.

Meat prices projected to stay above current averages, but dairy prices expected to gradually retreat from 2007 record levels

Given rising feed costs and strong meat demand in the major emerging economies, meat prices are expected to rise above historic levels in the medium term. Non-ruminant production is notably affected by high cereal and oilseeds prices as low-priced distiller’s dry grains (DDGs) cannot easily be integrated into their feed rations. These higher input costs are expected to result in increased meat prices over the next decade.

World dairy prices are expected to weaken somewhat over the next two years as supply responds sufficiently to strong price incentives. While prices are anticipated to decline from currently high levels, the expectation is that they will remain firm over the entire outlook and stay higher compared to the previous decade. As with the majority of other agricultural commodity prices, when expressed in real terms the well-established longer term falling trend was reversed radically in recent years. However, dairy products are expected to resume a modest declining trend in future years, albeit from a much higher level than in the past.

Some major issues and uncertainties

This year’s Outlook has been prepared in an environment characterised by increased

instability in financial markets, higher food price inflation, signs of weakening global economic growth and food-security concerns. The commodity markets have shown dramatic rises in prices across a range of commodities on a weekly basis, attracting the attention of the daily press and stimulating discussion on the food-feed-fuel debate. Although projections for agricultural commodity markets have always been subject to a number of uncertainties, these have taken on more importance in this year’s edition. As in the past, weather conditions, animal-disease outbreaks, the macroeconomic environment and domestic policies are all factors that will continue to affect agricultural market outcomes. The question for the forthcoming period is how these key factors and uncertainties will change over time and to what extent they will change the market outlook. Some of these uncertainties are discussed in detail in a separate section in this report.

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The uncertainties on the demand side seem to be lesser as steady year-on-year income driven consumption growth remains a basic feature of many commodity markets. Nevertheless, macroeconomic conditions are playing a crucial role for future market developments and a slowdown in economic growth as compared to that assumed in the

Outlook would moderate demand, international trade and agricultural commodity prices. In addition, exchange rate developments could have an important influence on the

markets as a change in domestic currencies vis-à-vis the US dollar would affect

comparative advantages and domestic market responses given price changes on international markets. A particular uncertainty on the demand side of agricultural markets is the growing presence and investments of non-commercial interests, such as financial funds, in futures trading on commodity markets. To what extent is the growing demand for financial derivatives affecting demand, risk management strategies and spot market prices for crops? And how will this further evolve in the future.

Policy interventions can also create uncertainty in commodity markets. Changes in biofuel policies, either to raise or to lower domestic targets or to review current policy incentives downwards, could be of major importance for agricultural markets given that biofuel production is one of the important factors lending strength to these markets over the medium term. In more general terms, there will be changes to domestic policies in key producing and trading countries such as new farm legislation in the United States, any changes that may results from the “health check” of the EU CAP or an eventual outcome to the current round of the Doha multilateral trade negotiations. Such and other changes

have not been anticipated in this Outlook and would affect market outcomes. Finally, high

international commodity prices have recently lead governments in several countries to introduce measures to restrict exports. While such policies may in the short term provide some relief to domestic consumers, at the expense of some further belt tightening by their neighbours, they impose a burden on domestic producers, dampen the supply response in these countries, and aggravate the global commodity market situation.

The policy issues

The key feature of this year’s Outlook is the record-high level of many agricultural

commodity prices. These are partly due to short-term factors such as drought in major cereal-producing areas and speculative activity. Once the influence of these transitory factors is removed or changes, prices will fall from current highs. However, there are factors at play that will keep prices well above average levels over the past decade. These include the steady growth in demand linked to population and income growth as well as changing diets in emerging economies, in particular China and India. But there are also factors that are uncertain into the future: energy prices, the diversion of land and crops for bioenergy, and climate change.

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markets, the impacts will be mitigated. But for the poorer segments of the population, and in particular for those in the net food importing developing countries, the impacts will be strongly negative as an even higher share of their limited income will be required for food consumption.

What are appropriate policy responses?

According to an old adage, the best remedy for high prices is high prices. High prices stimulate supply and dampen demand on agricultural markets, the balance will change

and prices will come down. But the Outlook also shows that prices are likely to continue to

average around substantially higher levels than in the past, possibly with larger variations around that higher average.

The Outlook for lower prices in the foreseeable future with the possibility of a turnaround being more rapid than is currently foreseen calls for caution in taking any precipitous policy action. However, the fact that certain groups in the population and certain countries suffer from current high prices and may continue to be worse off in a context of sustained higher price levels in the future provides a policy challenge.

In the short term, humanitarian aid for the populations in countries most severely affected is urgently required. Before recent price increases, although there had been improvements, hundreds of millions of people were going hungry because they could not afford food. With higher prices, the numbers of people suffering from extreme hunger has increased even further and the first UN Millennium Development Goal has become an even greater challenge. As suggested recently by the World Bank, aid in the form of cash or vouchers is more appropriate in many cases than commodity shipments, provided supplies can be procured. Such aid may also be more effective than short term measures, such as export taxes or embargoes, that restrain exports in order to ensure domestic market supplies.

In the medium term, there is a real need to foster growth and development in poor countries and to assist in developing their agricultural supply base. In some of the poorest countries, investment in agriculture, including in agricultural research, extension and education, which has been lagging in recent years, is often the best way to cut poverty and stimulate economic activity. Expected high farm prices may provide an incentive for this. In other situations, investment in agriculture may be helpful, but there is also a need to diversify the structure of the economy. In general, investments in improving the overall environment in which agriculture operates may be most appropriate. These include improving governance and administrative systems, macroeconomic policy, infrastructure, technology, education, health, and defining and enforcing property rights.

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It is also necessary to examine more closely the causes and impacts of the recent price increases. On the supply side, the link between production and yield shortfalls, climate change and water availability warrants further analysis, both in terms of trends, variability and risk. Investments in R&D, technology transfer and extension services, particularly in less developed economies, could do much to increase productivity and output and there may be a role for governments to foster this, especially where there are wider public benefits. In addition, the future development of genetically modified organisms (GMOs) also offers potential that could be further exploited, both to improve productivity and to enhance the attributes of crops destined for either food or non-food uses.

The largely policy driven nature of the rapid increase in the supply and demand for biofuels is one of the reasons for current and future higher prices. OECD/IEA analysis to

date2 suggests that the energy security, environmental, and economic benefits of biofuels

production based on agricultural commodity feed stocks are at best modest, and sometimes even negative, and are unlikely to be delivered by current policies alone. Alternative approaches may be considered that offer potentially greater benefits with less of the unintended market impact, such as policies that encourage reduced energy demand and greenhouse-gas (GHG) emissions, provide for freer trade in biofuels, and accelerate introduction of “second-generation” production technologies that do not rely upon current commodity feed stocks.

Notes

1. For a detailed analysis of the market impacts of biofuel policies, see OECD/IEA Economic Assessment of Biofuel Support Policies (forthcoming).

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